MALAWI'S CENTRAL BANKERS ANXIOUS ABOUT IMF MISSION

C O N F I D E N T I A L LILONGWE 000115

SIPDIS

SIPDIS

STATE FOR AF/S G. MALLORY, L. CECSARINI AND D. MOZENA
STATE FOR EB/IFD/ODF LINDA SPECHT AND ELAINE JONES
TREASURY FOR INTERNATIONAL AFFAIRS/AFRICA/BEN CUSHMAN
PARIS FOR D'ELIA

E.O. 12958: DECL: 02/06/2016
TAGS: EFIN ECON MI
SUBJECT: MALAWI'S CENTRAL BANKERS ANXIOUS ABOUT IMF MISSION

REF: A. LILONGWE 0020

B. LILONGWE 0037

Classified By: Econoff W. Taliaferro, for reasons 1.4 b/d


1. (C) Despite fiscal performance that has been described as
"impressive" over the past year, Malawi's central bankers are
nervous about the upcoming quarterly review from the IMF's
country team. At recent visits with the Reserve Bank of
Malawi's (RBM) Governor Victor Mbewe and general manager
Wilson Banda, they have expressed deep worry about the
February mission. The cause of their worry: Malawi's
persistently tight control over foreign exchange rates, in
defiance of the IMF's expressed concern that the Kwacha's
price should be determined by market forces. A reportedly
strong letter from IMF deputy managing director Takatoshi
Kato had impressed Banda enough to ask for U.S. support in
keeping the IMF from suspending its Poverty Reduction and
Growth Facility.


2. (C) IMF resident representative Thomas Baunsgaard
reassured us that no such move is being contemplated,
although senior staff at the Fund is "seriously concerned"
about the forex policy. He reports that the main issue is
credibility, as the GOM has committed to looser forex
policies for a year now but taken little action. Baunsgaard
said that, while the Fund is not contemplating any delay to
the next review, the review after that could be delayed if
the GOM does not show progress. Embassy supports this
approach. While the GOM clearly needs to be pressured,
precipitate action to suspend the PRGF would endanger HIPC
completion, in turn delaying the paydown of domestic debt and
seriously impacting the GOM's fiscal performance.


3. (C) As reported earlier (ref B),forex policy is clearly
being dictated from the finance ministry. Finance minister
Goodall Gondwe has had plain reasons for keeping the kwacha's
price high, as he has presided over massive importations of
grain and fertilizer to mitigate this year's hunger crisis
and perhaps avoid next year's. Now that the seasonal imports
are done and the export season is about to begin, he has let
the Kwacha slip again, from 125/USD to 130/USD in the past
two weeks. (In another demonstration of last-minute monetary
liberality, the liquidity reserve ratio for banks was
abruptly lowered last week from 27.5 percent to 20. This
move will probably not drive up inflation, since government
securities will absorb most of the new liquidity, but its
timing is odd.) While Gondwe's concern over the GOM's
fiscal performance is sensible enough, the high Kwacha has
been maintained at a considerable price to the private
sector. Malawi now has a large backlog of unpaid foreign
currency invoices, and many providers are increasingly
hesitant to ship here on credit. Add to that the RBM's
questionable mechanisms for enforcing the Kwacha's inflated
price (ref A),and the virtue of fiscal prudence starts to
look like bullying businesses for government's benefit.


4. (C) COMMENT: It is reassuring to know the IMF is taking a
steady-on approach while ratcheting up the pressure. When
the mission gets here, Gondwe will almost certainly argue
fiscal necessity, and he has a point. But because the
private sector's advocates cannot face Gondwe down, the IMF
has to. This entails addressing two main issues: the balance
between government and private interests in monetary policy
(which entails establishing some independence for the RBM so
it can argue against government's narrow self-interest),and
the question of informal controls (how exactly is the GOM
enforcing a strong-kwacha position?). If the IMF combines a
frank dialogue on these issues with a tough position on the
next review, it could remove another obstacle to growth and
investment.
GILMOUR